NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates the following Hampton, Virginia (the city) general obligation (GO) bonds:
--Approximately $43.6 million GO public improvement bonds, series 2013 'AA+'.
Proceeds from the bond issuance will be used to fund capital projects for the city's courthouse and school facilities. The bonds are expected to sell on or around April 8th.
In addition, Fitch affirms $259 million in outstanding GO bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the city for the payment of which the city's full faith and credit and unlimited taxing power are irrevocably pledged.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The city has maintained strong reserve levels and sound liquidity metrics despite a pressured operating environment. Financial management adheres to prudent fiscal policies and budgets conservatively.
AVERAGE ECONOMIC INDICATORS: The city's unemployment rate is on par with that of the nation. Wealth indicators are below national averages. Recent growth in healthcare, high-tech manufacturing, and retail has helped to diversify the local economy away from its historical concentration in military.
MODERATE DEBT: Fitch expects overall debt levels to remain moderate given the city's affordable future debt plans and rapid amortization of outstanding principal. Pension and OPEB liabilities do not represent large cost pressures.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE
The city of Hampton, with a 2011 population of 136,000, is located in the Hampton Roads region of southern Virginia.
MAINTENANCE OF STRONG RESERVES, STRUCTURAL BALANCE
Conservative budgeting practices coupled with expenditure controls have allowed the city to keep fund balance levels stable at far above the policy of unassigned balance at least 10% of general fund and school operating fund spending. Fiscal 2012 unrestricted fund balance totaled $92.6 million or a high 30% of spending, despite a $9.7 million (3.2% of spending) draw for capital and the procurement of property. Cash and investments of $94.2 million cover liabilities 4.5x.
The general fund budget, which remains structurally balanced, is not without certain operating pressures. Property taxes (approximately 50% of revenues) have dropped due to tax base declines. Fiscal 2013 assessed value (AV) of $10.5 billion is down 9.8% from a peak of $11.7 billion in fiscal 2010 and 4.4% year-over-year. Estimates for fiscal 2014 show an additional decline of 2.8%, which Fitch considers potentially bearish given modest improvement in the housing market during calendar 2013.
Despite these losses, the city has reduced its tax rate by $0.16 per $100 AV since fiscal 2007. This plan has resulted in the loss of $19.3 million, or 12% in property tax revenues. The current millage rate of $1.04 remains competitive for the region. There is not a limit on millage rate increases in the commonwealth of Virginia.
The city increased its cigarette and meals taxes in fiscal 2013, in an effort to raise recurring revenues. As a result of these tax hikes, the city expects to realize a modest amount of over $1 million in additional annual revenues.
To preserve its financial profile, the city has instituted recurring spending cuts over the past several years. Expenditure reductions to date have been comprehensive, including a reduction in workforce, deferral of capital projects, merger of key departments, and privatization of public works services. Any further cost cutting measures would most likely lower service levels.
The city's large unrestricted fund balance levels serve to temper this
inflexibility as they provide considerable financial flexibility. In
addition, the city funds an increasingly large portion of pay-go
capital, $30 million in fiscal 2012, and Fitch considers this commitment
another area of financial flexibility.
FISCAL 2013 BUDGET
The fiscal 2013 budget includes $6.4 million in appropriations of fund balance for capital and other one-time non-recurring expenses. Based on actual results through the second quarter, the city expects to end the year flat. Even if the draw is realized, Fitch believes reserves will remain more than adequate for the current rating category.
MILITARY CONCENTRATION
The military is a significant economic driver and employed approximately one-third of city residents in calendar year 2010, according to data collected by the Virginia Employment Commission. In addition to Fort Eustis, the city is home to Langley Air Force Base, which serves as the Air Force's air combat command center.
One of the area's military bases, Fort Monroe, closed in calendar 2012, but Fitch does not anticipate that this will significantly diminish the military's economic role in the city and region, given the sector's large presence there. Growth of nearby Fort Eustis has helped mitigate job losses from the Monroe's closure.
Though the potential effects of sequestration are unclear at this time, the city does not believe its military operations will be significantly impacted. Fitch will continue to monitor the situation.
CONTINUED GROWTH OF TECH MANUFACTURING, HEALTHCARE, RETAIL
The local economy continues to diversify with growth in high-tech manufacturing and healthcare. The NASA Langley Research Center in Hampton, with over 1,900 civil servants and 1,800 private contractors, has recently embarked on a 15-year, $250-million facility modernization program. Hampton University's Proton Therapy Institute (HUPTI), a $225 million research and treatment center established in 2005, is the nation's eighth proton therapy facility and the only such facility in the commonwealth of Virginia.
The presence of the retail industry has similarly grown. Peninsula Town Center (PTC), a mixed-use retail and residential development, is the largest redevelopment project in the city's history with a total investment of $276 million. Hampton's sales, meals and lodging tax revenues have increased due to activity at PTC as well as at the Power Plant at Hampton Roads and the Hampton Roads Convention Center.
Economic indicators for the city are mixed. The city's unemployment rate has historically trended below that of the nation and continues to do so. As of December 2012, the city's unemployment rate was 7%, comparing favorably to the nation's 7.6% rate. Wealth indicators for the city are 75% - 80% of the national averages.
MANAGEABLE DEBT BURDEN, CARRYING COSTS
Total debt includes moral obligation bonds of entities to which the city lends some support and equals a moderate $3,813 per capita and 4.7% of market value. Debt backed by the city's moral obligation is largely self-supporting; the city would face significant financial pressures should its proportionate share of these debt obligations increase. The city does not have exposure to variable rate debt, derivative products, or short-term notes.
The 2013 - 2017 capital improvement plan (CIP) includes $153 million in general government and school projects. Approximately one-third of the CIP is expected to be debt financed, with the current issuance representing the majority of these bonds. Fitch does not believe that the city's additional issuance plans will materially impact credit quality.
Annual carrying costs related to debt service and retirement benefits amounted to $52 million or a moderate 16% of governmental fund spending (less capital) in fiscal 2012. Of this amount, debt service represented the lion's share at $31.6 million or 9.7% of spending.
Contributions to the state-administered Virginia Retirement System (VRS) and the city-administered Hampton Employees' Retirement System (HERS) totaled $18.4 million or 5.7% of spending. The city's HERS plan is funded at a weak 67%, as is the city's portion of the VRS (both are calculated using an adjusted 7% return rate). Fitch notes that poor funding may pressure future contributions.
The city funds its other post-employment benefits (OPEB) liability on a pay-as-you-go basis and is considering taking measures in fiscal 2014 to limit this liability, by reducing benefits and beginning a trust to pre-fund the liability. For fiscal 2012, the city contributed $2 million (0.6% of spending). The UAAL of $60.6 million represents an affordable 0.5% of MV.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported
Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
U.S. Local Government
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported
Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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